The high national debt of many countries causes economic uncertainty. But it would be far from the first time that countries facing ruin have had a large part of their debt forgiven.
There are repeated calls for a debt haircut for certain countries – due to the financial burdens caused by various crises and challenges. This means that a large part of the countries’ debts should be canceled in order to help them get back on their feet economically. This has worked impressively several times in the past. The ranking shows the largest debt relief in recent economic history. The source of the ranking is “Sovereign Debt Relief and its Aftermath,” which was written by the two economists Carmen Reinhart (Harvard University) and Christoph Trebesch (University of Munich). The data is as of February 13, 2024.
Editorial team finanzen.net
14th place: The ranking
The following ranking shows the largest debt haircuts in relation to the country’s economic performance. The data used comes from the study called “Sovereign Debt Relief and its Aftermath”, written by economist Carmen Reinhart (Harvard University) and economist Christoph Trebesch (University of Munich). The status of the ranking is February 13, 2024.
Source: Sovereign Debt Relief and its Aftermath, Image: MarcelClemens / Shutterstock.com
13th place: Germany
In 1953, the Federal Republic of Germany was to be made internationally eligible for credit again in order to be able to finance reconstruction. The solution: a haircut, which at the time amounted to 20.3 percent of the country’s economic output. In the so-called “London Debt Agreement,” Germany agreed with around 70 other countries to reduce both pre-war debt and reparation payments. This paved the way for Germany to an increasingly flourishing economy.
Source: Sovereign Debt Relief and its Aftermath, Image: S.Borisov / Shutterstock.com
12th place: Argentina
After losing the Falklands War in 1982 and the associated overthrow of the military regime and the restoration of the democratic system, Argentina faced economic ruin. Only a haircut – which was repeated in 2001 – could save the country from ultimate bankruptcy. From 1982 to 1993, Argentina had debts worth 24 percent of its economic output canceled – the twelfth largest debt haircut in recent economic history.
Source: Sovereign Debt Relief and its Aftermath, Image: Matt Trommer / Shutterstock.com
11th place: Great Britain
After the end of the First World War in 1918, Great Britain’s financial position was greatly weakened. In addition, there were interallied debts and horrendous loans for the reconstruction of the country. The Allies’ proposal to cancel all debt within the alliance was met with resistance in the United States. Through various treaties such as the “Baldwin Treaty” Great Britain managed to negotiate a haircut of 24.5 percent from 1923. Eleventh place in the ranking.
Source: Sovereign Debt Relief and its Aftermath, Image: istock/david franklin
10th place: Ecuador
Until the late 1990s, Ecuador was the most indebted country in Latin America. Ecuador’s foreign debt exploded back in the 1980s. Between 1982 and 1995, the so-called debt-for-nature swap was introduced here. International non-governmental organizations with ecological and social goals bought the foreign debt of a heavily indebted country at a significantly reduced value in relation to the nominal value. In a second step, negotiations were started with the debtor government, in which the government agreed to invest in social and environmental projects in local currency. Ecuador’s debt was reduced by 31.2 percent of the country’s economic output.
Source: Sovereign Debt Relief and its Aftermath, Image: Creative Photo Corner / Shutterstock.com
9th place: Uruguay
Uruguay also faced major financial problems during the international debt crisis in the 1980s. Like many other developing countries, Uruguay had taken out loans from financially well-off industrialized countries without being able to pay them off afterwards or repay the interest due. This resulted in a haircut from 1983 to 1991, without which Uruguay’s economy would probably no longer have gotten back on its feet. 34.3 percent of the country’s debt was forgiven – ninth place in the ranking.
Source: Sovereign Debt Relief and its Aftermath, Image: Barbra Ford / Shutterstock.com
8th place: Chile
The developing country of Chile was also unable to resist the loan offers from the industrialized countries and was almost insolvent from 1980 onwards. In order to be able to repay loans and interest, new loans were needed, which could only be approved after a haircut – a vicious circle. Ultimately, between 1983 and 1990, Chile was approved for debt relief of 35.6 percent relative to economic output, placing Chile eighth in the ranking of largest debt cuts.
Source: Sovereign Debt Relief and its Aftermath, Image: istock/Hans Laubel
7th place: Mexico
In order to be able to pay its foreign loan debts, Mexico cut its imports by around 70 percent in the 1980s so that a profit could be made from export revenue. However, the import ban drove the country further into misery; there was a lack of raw materials and other materials. Debt relief was essential in order to obtain new loans. Between 1982 and 1990, Mexico’s debt was canceled worth 36.2 percent of the country’s economic output.
Source: Sovereign Debt Relief and its Aftermath, Image: dubassy / Shutterstock.com
6th place: Italy
Italy takes sixth place in the ranking. Italy also had to struggle with its post-war debts to the USA. In 1925, the United States and Italy agreed on a war debt agreement, which guaranteed Italy debt relief amounting to 36.4 percent of economic output. There is also ongoing debate about a haircut for Italy.
Source: Sovereign Debt Relief and its Aftermath, Image: leoks / Shutterstock.com
5th place: Venezuela
Venezuela was once a wealthy oil-producing country, but was heading straight for financial collapse in the 1980s. For months, the country was unable to pay interest or repayments, but also did not want to accept the austerity measures of the International Monetary Fund (IMF). State-imposed wage cuts, cuts in housing construction and the cancellation of food subsidies drove many people to hunger. Between 1983 and 1990, Venezuela received debt relief amounting to 41.6 percent of the country’s economic output.
Source: Sovereign Debt Relief and its Aftermath, Image: istock/ Pawel Gaul
4th place: Costa Rica
Like so many other countries in this ranking, Costa Rica also became part of the Latin American debt crisis of the 1980s. To promote industrialization, Costa Rica borrowed large sums of money from industrialized countries. Between 1975 and 1982, the total amount of commercial banks’ claims on Latin America had increased by 20.4 percent annually. This circumstance led to a quadrupling of Latin American foreign debt. The debt relief granted to the country from 1983 to 1990 was equivalent to 43.4 percent of the country’s economic output.
Source: Sovereign Debt Relief and its Aftermath, Image: istock / Duncan Walker
3rd place: Greece
Since the 1920s, the Greek economy and its banking system have been characterized by inflation. The Asia Minor War made the situation even worse and led to increasing circulation of notes, forced loans and foreign exchange controls. In the years 1927 to 1934, the country had to be granted debt relief of 43.4 percent in relation to economic output. After the end of the eight-year aid program in 2018, Greece is financially on its own two feet.
Source: Sovereign Debt Relief and its Aftermath, DeStatis, Image: portokalis / Shutterstock.com
2nd place: France
Second place in the largest debt cuts in history goes to neighboring France. In 1926, the French ambassador concluded a funding agreement with the American finance minister that was intended to settle the French inter-Allied war debts from World War I. A debt relief of 52.2 percent of the country’s economic output was decided. With national debt amounting to 115.7 percent of GDP, France also suffered enormous financial damage from the corona pandemic in 2020.
Source: Sovereign Debt Relief and its Aftermath, DeStatis, Image: Domen Colja / Shutterstock.com
1st place: Bulgaria
In 1990, the country of Bulgaria, which had been severely affected by socialism, was facing financial ruin. Industry was outdated and making losses rather than profits, citizens refused to work and agriculture was almost idle. Without the debt relief of 55.6 percent in relation to the country’s economic output, Bulgaria would probably no longer have a green path. First place in the ranking.
Source: Sovereign Debt Relief and its Aftermath, Image: pavelgr / Shutterstock.com